Wesfarmers Ltd (ASX: WES) is reported to be seeking a buyer for its Kmart Tyre & Auto Service business according to the Australian Financial Review.
The conglomerate seems to have looked at offloading pretty much every single segment to its business except Bunnings over the past year. Coles is being separated into its own ASX-listed entity, Officeworks was consideration for selling and there was talk of putting Kmart, Target and Officeworks into their own separate entity.
Kmart Tyre & Auto Service is a sizeable business, it apparently sells around 8% of tyres in Australia, which amounts to just over $400 million in revenue.
I can understand why Wesfarmers is looking to move on the business. Car servicing is becoming an increasingly competitive industry between a group of a few main independent players.
However, they’re all at a disadvantage compared to the official car dealership service businesses. Cars are now incredibly complex with a lot of functions carried about through the car’s computer. You would have to be a computer programmer who knows code to understand how to diagnose and fix the car’s computer.
Car companies now ‘offer’ several years of servicing when they sell a new car, which ties up the servicing for their dealerships. The independents are left fighting over older cars and the few new cars that the owners don’t want to use the offer.
Wesfarmers seems to want to rapidly change the structure of its business. Simplifying is a good thing, but I hope management have a good idea about where the company will reallocate the capital.
The shares are currently trading at 18x FY18’s estimated earnings. I don’t think Wesfarmers is a buy at the current price until we see what the new Wesfarmers business will look like.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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